Fortis sees CO2 trade focus on China methane

HONG KONG, June 6 (Reuters) Fortis Bank sees huge carbon potential in methane projects in China, the world's top coal producer and home to the largest pig farms, where the gas can be captured to sell as credits under the Kyoto Protocol.

Shane Spurway, director of Fortis carbon market Asia, said methane would be a key part of China's contribution to a booming world market in credits for reducing emission of gases that cause global warming.

''I'd be expecting volume this year to be between 40-50 billion dollars,'' he said in an interview as part of the Reuters Energy Summit, adding that last year's volume was around billion.

Fortis Bank, a Belgian-Dutch financial group, plans to expand its newly established Hong-Kong carbon trading base to include up to five staff by the end of this year. It already has a 16-person carbon trading desk in Europe and a two-to-three person desk in the United States.

Investors are flocking to China, the developing world's biggest supplier of credits under the Kyoto Protocol's Clean Development Mechanism (CDM), which allows rich nation polluters to fund emission cuts in developing countries and then put them towards domestic quotas.

Beijing was late to embrace the system but is now strongly supportive of an investment channel it hopes will promote greener development and technology transfer, funded by wealthy powers.

Methane is a particular focus because it offers relatively easy pickings for investors and ties in with Beijing's efforts to improve standards in the world's deadliest mining industry.

''We're talking about millions of tonnes of credits there,'' Spurway said. ''It (methane) will probably be one of the most popular projects in the next three to four years.'' Destroying one tonne of methane per year equals a reduction of around 20 tonnes of carbon dioxide, because it is more effective at trapping heat and it also meets government goals.

''It helps increase employment, makes coal mines safer and they don't have to use their own money to bring in these pollution-reducing devices,'' Spurway said.

Some methane projects in China are also in animal farms, which gather the gas from waste and burn to generate power, he added. China has the world's largest herds of pigs and flocks of poultry.

BEYOND KYOTO, FORESTS Referring to preserving forests, which capture carbon dioxide, he said: ''The forestry projects should be the easiest and the best ones to do. But the methodology is the most complicated and the hardest.'' Spurway said while the current European scheme did not allow forestry projects, conservation would be perfect for countries such as Malaysia or Indonesia, which are wrangling with deforestation and logging problems.

Germany's Chancellor Angela Merkel has made climate change the focus of a G8 summit this week, but it is unclear if they could agree at least the outline of a system to replace the current one that limits emissions up to 2012.

''The business is driving the search for a process after 2012. The pressure is on the United Nations to come up with a deal,'' he said. ''Even if there's no Kyoto 2, Europeans will still have a trading scheme up there.'' However, an Asian carbon exchange was unlikely to emerge at present, Spurway said, because few countries had obligatory emissions targets, which would limit participants and liquidity.

Though Japan has a target, the country had not yet divided it into quotas for individual industries or companies.

Looking into future, he added: ''Logically probably Singapore or Tokyo are in the strongest seats. Tokyo obviously, because of the demand requirements.'' REUTERS PBB RS2012